The Big Picture

An essay drawing together overall perspectives, global themes and major overarching trends into an overall context for global macro top down financial trading.

Introduction

Homo Sapiens: the most fearsome predator the world has ever known and the most amazing lifeform to evolve on Earth – so far. Distinguished from other animals by a highly evolved brain, that brain has enabled us to become agents of technological evolution, which in turn has created a vast gulf between ourselves and other animals.

We can move faster than other creatures (cars, trains, airplanes) and are the strongest too (cranes, diggers, dumpers). We can swim under the sea, fly in the air and even travel into space (diving equipment, paramotor, rocket). We can see deep into space (space telescope, satellite and computer), see what’s taking place on the other side of the world (television, internet), and see in the dark (night vision goggles). We can correct faults with ourselves (transplants, lenses, artificial limbs). The list goes on and on: we have become a super-species. The comparative pace of biological evolution to technological evolution has rendered the former negligible.

But despite our total dominance, homo sapiens has one evenly-matched competitor: other humans. We have developed bombs, tanks and missiles and to deploy on people alone. We battle with each other for resources: as we live in a finite world the acquisition of land, housing, cars, electronics and more, is necessarily at someone else’s expense. These traits of self-interest and competitiveness are embodied in capitalism, the system that has become dominant globally.

But is our relentless pursuit of consumption compatible with our environment (pollution, climate change, species extinction, resource exhaustion)? Are we too successful a predator, given that the human population is growing relentlessly towards the Earth’s carrying capacity? Is anyone actually in charge of our globalised system of economic growth, or is it a juggernaut potentially heading for a crash? It would be nice to think that world leaders are in control, but in fact all they can do is make minor tweaks, as the system is so widely and deeply networked most of the world over, with the popular support of the human majority. Only a crash will likely change this.

Ultimately, it is not what we are doing, but how many of us are doing it. It is possible we may eventually see a large-scale cull in homo sapiens, either through eco-system collapse, climate change or fossil fuel exhaustion and resource scarcity, as that may be the ultimate destination of the juggernaut. But in the meantime, we might embrace technological evolution, as it is likely to be our lasting legacy. Rather than ‘playing God’ we might consider that evolution itself has evolved from biological to technological, through us. And the logical conclusion of that process is likely to be non-biological intelligent life that can create and better itself in the way we can, permanently changing reproduction on Earth from only DNA-based to something non-biological also.

In this essay I will try to provide a condensed overview of the key global macro themes that need to be understood for top-down trading. That means drawing together overall perspectives and major overarching trends into an overall context: human existence and human systems in a nutshell.

Time

The Universe is approximately 13.7 billion years old, and our Earth formed around 4.6 billion years ago.

Imagine our Earth is 1 year old and came into existence at 00:00h on the 1st of Jan, and that we are now at midnight on 31st December. The first basic lifeforms appeared on our planet by early May, fish evolved around mid-November and the first creatures to move on land appeared at the end of November. Reptiles dominated from early December until the dinosaurs were wiped out by mid-month, after which mammals came to the fore. It was not until the morning of December 31st that the first ape-men appeared, and modern human beings – Homo Sapiens – only feature in the final hour of the final day.

In just the last 4 seconds of the year – the industrial revolution onwards – humans have totally transformed the face of the planet. 75% of the world’s land surface has been deforested or changed by humans into farm land, cities, roads, open mines, reservoirs and other manmade constructs. The oceans are now 30% more acidic, and overfishing has depleted big fish stocks by 90%. Burning fossil fuel resources to power, heat and transport a human population that has grown from 1 billion to 7 billion since the industrial revolution has increased carbon dioxide, methane and nitrous oxide concentrations in the atmosphere by 15-30%.

If we continue the calendar year time analogy into the future, Earth will become uninhabitable by March in the new year, due to the Sun’s expansion, by which time any life will have to find a new home elsewhere in the Universe.

Space

The Earth is one of 9 planets that make up the solar system around our star, the sun. Our star is one of around 100 billion in our galaxy, the Milky Way. Our galaxy is one of at least 50 billion galaxies in the Universe.

An analogy for the total number of stars in our universe is the number of grains of sand on all the beaches of our world. Of course grains of sand are touching one another but in space there are vast distances between. The nearest star to our sun (our neighbouring sand grain) lies 4 light years away (it takes light around 4 years to reach us from it), or 24 thousand billion miles. It is named Proxima Centauri. Imagine intelligent life inhabited a planet orbiting this star. If we trained ultra powerful telescopes on one another, it would take 8 years just for a single two-way visual communication. At current spacecraft speeds, it would take perhaps 75,000 years to reach it by probe. Future technological advances may be able to improve on this: nuclear pulse propulsion could potentially push spacecraft speeds to 5% of the speed of light, which would make Proxima Centauri reachable in 80 years or so.

Sadly, this nearest star appears to be devoid of orbiting planets. To date, several hundred planets have been detected around stars further afield, but so far none are solid candidates for the evolution of intelligent life. The image below is of the Milky Way, and our solar system’s approximate position within it – in one of the spiral arms. The circle shows the local area to us in which we are trying to detect planets. Our galaxy is 100,000 light years across.

Source: Wikipedia

There is nothing special about our position in the Universe. We orbit an ordinary star out in the arm of a common galaxy.

Cycles

Nature is dominated by cycles and human life is subservient to many such cycles.

Seasons, tides, sunspots, geysers, migrations, heart beats, wing beats, menstruation, respiration, births and deaths, sound waves, rotation of galaxies, sleep and Ice Ages are all examples of cycles in nature, and there are many, many more.

As humans we cycle relentlessly with heartbeat, respiration and other biological rhythms. But this cyclical subservience is found in all arenas and on all timescales.

Here is the daily cycle of the biological human clock:

Source: Wikimedia Commons

Day and Night, and the cycles of sleep and activity. Weekdays and Weekend (division of time based on Earth’s orbit of the sun), and the cycles of work and play. Seasons, and the cycles of agriculture, animal migration and human activities (traditions, cultural and sporting events that cycle with the Earth’s orbit of the sun). Lifetimes, the cycle of reproduction, and the societal cycle of education – work – retirement.

There are several major biogeochemical cycles that are fundamental to all life on our planet:

There are lunar cycles and the associated cycles of nocturnal illumination and tidal movement. There are solar cycles and the associated cycles of geomagnetic storms and earthquakes. There are cycles of temperature, of winds, of storms, and their influence on animals and plants.

It should come as no surprise that we then observe cycles in systems of human construction, which may be abstractions of nature but are still ultimately of nature. Business cycles in economics, asset and sentiment cycles in financial markets, arguably war and peace cycles.

Understand that no cycle lasts forever. Our sun will eventually expand and consume the nearest planets and then collapse into a dwarf star. But for forecasting over months, years or decades, these cycles are effectively permanent. The dominance of cyclical phenomena in all things makes the future much more predictable.

In short, nature is dominated by cycles. Human life and human systems are subservient to and synchronized to these cycles.

Money And Debt

Originally there was barter and exchange, and then local use of precious stones or metals or other materials as early forms of payment. But modern money really got going through goldsmiths, who sprung up in response to gold owners who wished to keep their precious metal somewhere safe. The owners were given a redemption note, effectively a promise to pay out the gold when they wanted it. However, the owners then started to use these notes occasionally to pay for goods and services, meaning the redeeming owner changed and the gold stayed put. Gradually, the redemption notes acted as currency and there was little gold redemption. In response to this, the goldsmiths took a gamble and issued more notes than they had gold, charging interest on these notes. So began the banking practice of creating money out of thin air as debt, with only partial asset backing.

Today, it is known as fractional reserve banking and is common globally. Banks can lend out a multiple of the amount that they have in deposits, say 10 times, on the basis that they do not expect all depositors to withdraw their cash at the same time. Governments also create money out of thin air by issuing bonds, which are interest paying debts backed by future tax receipts, i.e. when the bonds mature money from the government’s net income will pay the redeemer. However, net income typically falls short when recessions decrease tax receipts or war increases spending and these accumulate over time. The result is that bonds are issued to pay for other bonds maturing, and the debt issuance has to rise each year.

The result of these banking and government systems of lending is an exponentially growing superstructure of credit. Consequently around 3% of money in the Western world is actual notes and coins and the rest is debt. Notes and coins are made by the Government and sold to banks who then supply people and businesses when they make withdrawals. Ultimately this is the only real fiat money in circulation and if everyone decided to withdraw all their money on the same day there could only be 3% satisfaction. Whatsmore, as the gold standard was abolished in 1971 meaning fiat currency is no longer convertible to gold, that 3% real cash is intrinsically worthless. It’s therefore all about maintaining confidence.

To complete the picture, the last two decades have seen another layer added to the credit superstructure: derivatives. In the diagram below we see an inverted pyramid of precious metals, notes and coins, debt, assets and at the top by far the biggest and least stable class, derivatives. A derivative is a contract that provides exposure to and derives price from an underlying asset, such as real estate or commodities. Derivatives allow participants to take large positions in the market for relatively small amounts of capital, and there can be multiple large derivatives on the same underlying asset. As a result, the US housing bubble pop had massive and far-reaching effects because of the sheer size of derivatives that were ultimately linked to the underlying real estate, and banks exposure to these.

Source: RunToGold.com

This top-heavy financial system based on exponential debt is akin to a giant ponzi scheme. It has to be kept going because the redemption of each layer is bigger than the underlying layer. Hence the bail-out of the banks in the 2007-9 crisis.

Economic Growth

Growth-based democratic capitalism has become the dominant political and economic system globally. Since the majority of countries that were practicing command communism made a full or partial switch in the 1980s and 1990s, trade barriers have come down and globalization has merged countries into one system with growth, self-interest, short-termism, private ownership and the commodification of nature at its heart.

The principle behind the system is that continual growth is the key to poverty reduction – that people can help themselves to disproportionate shares of the pie as long as the whole pie grows so that more people find themselves better off than less. But as human population has been growing exponentially, so growth has had to increase even faster, for the system to work. Thus, yearly growth targets range from 2% to 10% around the world, which makes for a sharp exponential curve when compounded annually.

The system has problems.

Firstly, we live in a world of finite resources and non-replenishable fossil fuels that are becoming increasingly scarce. We have effectively been spending our geological inheritance to fund the system, which makes it ultimately unsustainable. An economy of exponential growth is irreconcilable with a finite environment.

Secondly, its self-interest and short-termism has meant there has been little accounting for pollution, climate change and falling biodiversity. As we need healthy land for agriculture, healthy forests for timber, healthy seas for fisheries and clean air and water for living, the system may be creating more poverty for future generations, rather than less. The economy is a subset of the eco-systems that contain it, yet the system looks upon it the other way round, converting nature into natural resources or natural capital. Growing the economy really means shrinking the eco-system.

Thirdly, no limits to private interest and greed have produced a global society of massive inequality. The richest 1% of humans own around 50% of the world’s wealth, whilst the bottom half of the world’s population own just 1% of global wealth between them. As we hit peak resources and food and water scarcity, the bottom 50% may find themselves increasingly priced out of the essentials for life, and revolt against this global plutonomy.

Fourthly, growth naturally ebbs and flows in a business cycle, but in recent decades periods of zero growth or negative growth have been artificially papered over by expanding debt and cheap borrowing (individual, corporate or government). Be under no illusions: credit is taking from the future and having it now. It must be repaid at some point by a period of frugal living otherwise it becomes a large ponzi scheme destined for collapse, but which generation will accept frugal living to pay for their ancestors’ greed?

The chart below shows the world of exponential trends that we live in: economic growth, temperature, population, emissions, deforestation, species extinction, water usage and more. In nature, exponential phenomena typically hit a breaking point and then collapse as steeply down the other side.

Source: EndOfCapitalism

Unless we reverse global population, consumption and production trends, then we are reliant on technological evolution to push back these growth limits. Railways, electricity, computers and the internet all provided paradigm shifts in efficiency and cost reduction, enabling us to produce more and for less, growing the overall pie. As the rate of technological evolution has also been increasing exponentially, then we can expect more paradigm shifts ahead. But regardless of what technology delivers, it is unlikely to be enough on its own. A gradual move to a steady-state economy appears inevitable over the long term.

A steady state economy would essentially be a non-growing sustainable economy, where all the system’s inputs and outputs would all be accounted for and the focus would be on maintaining stable levels of natural capital and stable population. Runaway private affluence would not be permitted, but overall quality of life would increase. Clearly, this would take a fairly radical shift in mindset, and we may need to hit a major resource crunch point first with the current system to force such a change.

Climate Change

Natural Disasters and Global Warming.

Taking a consistent and comparable view of just the last 50 years, natural disasters, climate change and species extinction are rising over time. The primary explanation for all bar global warming (which is not measurement of frequency) is that better recording techniques over time are responsible for what appears to be increasing occurrence. However, we have enjoyed fairly comprehensive and consistent observation in these fields over the last 3 decades, and yet homing in on just this period we still see rising trends. Only droughts and tsunamis perhaps lack clear acceleration. So we can conclude that better detection is partially responsible, but that there is a real underlying increase in the bulk of these phenomena.

In short, human disruption of the biosphere is a cause of both climate change and increasing natural disasters, and these two collective phenomena are correlated. Consider that our biosphere is a system of natural equilibrium. Everything is interconnected in a series of balances and checks, in food chains, geological cycles and eco systems. A change in one area that creates an imbalance typically produces a natural response that creates a new balance. This is biological evolution. Occasionally a large-scale shock event will cause a major disruption, such as a large asteroid collision or a supervolcano eruption, and there will follow a long period of re-adjustment as a new biosphere equilibrium gradually forms.

Human beings, in the period since the industrial revolution, have been the agents of such a large-scale shock event. Consider that this period in question represents just 0.0000001% of the Earth’s history, and yet in that time we have totally transformed the face of the planet: 75% of the world’s land surface has been deforested or changed by humans into farm land, cities, roads, open mines, reservoirs and other manmade constructs. The oceans are now 30% more acidic, and overfishing has depleted big fish stocks by 90%. Burning fossil fuel resources to power, heat and transport a human population that has grown from 1 billion to 7 billion since the industrial revolution has increased carbon dioxide, methane and nitrous oxide concentrations in the atmosphere by 15-30%. We have created massive imbalances and are experiencing natural reaction. But rebalancing takes time, and we should expect more changes in natural phenomena ahead. There is also the risk that there may be tipping points in the geological systems: thresholds that bring about a step-change in the frequency of major events, eco system collapse or a jump in temperature.

So what are the implications?

Increasing frequency of natural disasters coupled with a rapidly rising global human population means that we are likely to see natural disaster events becoming more common in the years ahead, and experience record numbers in humans affected and economic impacts.

Agricultural harvests are to be increasingly impacted by abnormal global temperatures and extreme weather patterns, so we should not be surprised to see food supplies intermittently falling short in the face of increasing global demand, and spikes in prices due to inelasticity of supply.

Rapid species extinction can also mean food shortages, not only directly but indirectly, as links are removed from the food chain. Closely related to species extinction is eco-system collapse, a trigger point that would create a food crisis that may be irreparable. In other words, human population would be culled until it reached a level compatible with the new food scarcity.

Options

Humans pro-actively move away from the short-termism and commodification of nature of democratic capitalism, to steady-state systems with population growth reversal and a new infrastructure not based on fossil fuels.

Exponential technological evolution delivers several paradigm shifts in the next 2-3 decades that significantly alter the status quo, such as the global roll-out of a geniuinely scaleable renewable energy source and the successful harnessing of nano-engineering at the molecular level that allows us to create any substance. These could help cut natural plundering, global pollution and reliance on natural harvests.

The current trends continue until nature successfully checks human expansion by delivering one or more mega-events, or increasingly frequent events, that cull a large segment of mankind, or continually trim human population directly or indirectly.

Previous mass extinction events on Earth were all concluded with the cull of the perpetrator. Ultimately, the problem is not what humans are doing, it is how many of us there are doing it. With global population expected to grow by 50% from 2000 to 2050, and the rapid industrialisation of population giants China and India, the current suite of ‘green’ policies agreed by leading countries is impotent. A vastly reduced global population would return us to a sustainable rate of resource consumption, eco system infringement and pollution. Nature may impose that painful solution upon us.

Human Population And Solar Variation

World population has grown exponentially over the last 2000 years:

Source: Sub-dude

As has GDP per capita:

Source: filipspagnoli

A principle of the globally adopted capitalist economic model is that compound growth enables long term poverty reduction: that people can pursue their own self-interests and help themselves to disproportionate shares of the pie as long as the whole pie grows so that more people find themselves better off than less. Hence countries typically target 2%-10% annual growth, which when compounded means exponential growth. To achieve exponential economic growth we need either exponential population growth or exponential per capita growth (ideally both). The latter reflects human progress and technological evolution whereas the former is more of a ponzi scheme, requiring ever increasing numbers of people to maintain an ‘illusion’ of increasing prosperity.

Something changed around the 1970s. The growth rate in world population went into decline:

Source: TimesHigherEducation

World GDP growth and GDP per capita growth also trended to a peak.

Source: DoctorCopper

The pick up in GDP and per capita GDP in the 2000s is now rolling over again, suggesting the secular trend remains down:

Source: TheNextRecession

Source: TheNextRecession

The peak in population, GDP and GDP per capita growth rates fits with the peak in solar variation: the grand solar maximum:

Source: WattsUpWithThat

The trend in long term solar variation suggests we are now headed for another minimum, like the Dalton or Maunder. These historic minima corresponded to lower GDP growth and lower population growth, cementing the relationships between the three.

Inflation also peaked around the 1970s:

Source: Yardeni

As did growth in energy supply.

Source: Financial Press

Declining rates of growth in population, GDP, GDP per capita, inflation and energy supply spell major trouble for a global system reliant on exponential economic growth as well as inflation and employment targetting. However, the true impact of this has been postponed in two ways.

Firstly, the ‘gap’ has been filled by increasing debt:

Source: isj.org.uk

However, we have reached the point of debt monetisation in US, UK and Japan, i.e. the end game. The question is how long the end game can last.

Secondly, sub-demographic trends of the major economic nations have largely been supportive since the 1970s, peaking out in phases.

Here is US population growth per decade. Forward it by 40 years so that the births become the important ‘middle’ age bracket and we get the secular trends in real US stock prices: down into 1980, up into 2000, then down projected out to 2030.

Source: Business Insider

Here is Japan’s 5-yearly population growth rate. Again, forward it 40 years and we have a big spike in the middle bracket to deliver a major peak in equities and real estate around 1990, a small relief uptrend in the current window 2010-2015 (as we have seen) and otherwise a fairly grim outlook.

Source: Stat.go.jp

Collective dependency ratios, middle-to-old ratios and net investor ratios in the major nations were largely positive until recently, with China the last to break down:

In summary, we have postponed the impacts of the major growth rate peaks (GDP/GDP per capita/population) of the 1970s through debt until we have reached the point of monetisation, and the support from demographic sub-trends of the major nations has now expired. Solar maxima have historically given way to recession, and solar variation predicts a new grand minimum ahead which has historically correlated with low GDP and population growth.

Technological Evolution

Biological evolution has become negligible due to its relative pace to technological evolution. Technological evolution, through humans, is now the engine of evolution, and its pace is exponential. Think how little eyes have evolved biologically in the last century, yet we can now see the deepest reaches of space (telescope) and sub atomic particles (microscope), we can see in the dark (night vision goggles) and see live events on the other side of the world (television, internet).

The first chart below is log scale on both axes, showing an increasing rate of paradigm shifts (major revolutionary changes), from first biological evolution and then technological evolution.

Source: Ray Kurzweil

This second chart shows the trend in artificial intelligence 1900-2000, and its projection, again exponential.

Source: Ray Kurzweil

Due to its exponential pace, it is highly likely that in the decades ahead we will see a number of further paradigm shifts that will alter life in ways we may not be able to imagine. But we can identify certain potential candidates:

Nanotechnology

Biotechnology

Artificial Intelligence

Space Exploration

Alternative Energy

Ray Kurzweil believes that we are trending towards what he terms the technological singularity around 2050, where we will have produced the first ultra intelligent machines. Many times more intelligent and capable than human beings and plugged into all of human knowledge (via the internet), these artificially intelligent beings may then take over as the agents of technological evolution and be able to improve themselves, thereby creating a runaway process, which perhaps represents our current ‘prediction wall’, i.e. the limit beyond which predicting the future becomes futile.

Final Words

Humans can survive 3 minutes without oxygen, 3 hours in extreme temperatures, 3 days without water (no food) and 3 weeks without food. We are fragile, and a large-scale global event has the potential to cull a large proportion of the population, or even rapidly bring about our extinction.

99% of all species that have ever lived on Earth are extinct. There have been several mass extinctions on Earth and Humans are the agents of the current mass Holocene extinction event. All previous mass extinction events came to an end with the removal of the agent.

But humans may create a lasting legacy. By 2050 we may have created genuine artificial intelligence, though reverse engineering the human brain. Evolution, which has been DNA based as far as records date back, may undergo a paradigm shift to something non-DNA based.

In the meantime, mankind faces a crunching of problems: a slowing rate of growth and increasing debt, negative demographic trends and a possible grand solar minimum, climate change and increasing natural disasters. The risk is of increased protest, conflict and war due to hardships both economic and natural.